Piramal-Shriram transaction: More than just a deal between Ajay Piramal and R Thyagarajan

The Rs 2,014 crore deal they sealed last week owes itself, more than anything else, to the personal chemistry the two men struck up.

Ajay Piramal and R Thyagarajan met for the first time just 20 months ago. The Rs 2,014 crore deal they sealed last week owes itself, more than anything else, to the personal chemistry the two men struck up, reports ET.

Sometime in mid-2 01 2 , Srinivas Balasubramaniam, a young, low-profile investment banker with UBS Corporate Finance sought an appointment with Ajay Piramal. He wanted to explore if the chairman of Piramal Enterprises— which was endowed with Rs 18,000 crore from the sale of its pharma business and which had earmarked financial services as a growth area—would be interested in investing in the Shriram Group, a solid and accomplished name in financial services.

When they met, Pirmal, who had stitched more than 20 deals without using any bankers, expressed reservations.

He told Balasubramaniam he wasn’t sure about its ownership structure, where an employee trust owned threefourths of the group, and its mix of businesses. He also wondered about the cultural match between a Marwari businessman and a conservative Southern group.

It was a view shared by Narayanan Vaghul, the architect of ICICI Bank whose counsel Piramal seeks; as also by two Piramal board members, Deepak Satwalekar, former chief executive and MD of HDFC Standard Life Insurance, and Amit Chandra, MD of Bain Capital. “Just see ‘RT’ once,” Balasubramaniam requested Piramal to meet R Thyagarajan, the 77-year-old founder of the Chennai-based Shriram Group, which is worth about Rs 10,000 crore.

Piramal and Thyagarajan met at a hotel in Chennai, along with their advisors.

That four-hour meeting would be the first of 10 meetings, interspersed by long weekend conversations, culminating in a deal that has the ability to redraw the country’s financial services pecking order.

It also marked the beginning of a personal relationship that was rooted in financial services, but routinely sidetracked into business values, classical music, maths and spirituality, among other things. It was that alchemy that, more than anything else, forged a match that many people close to Piramal and Thyagarajan believed was neither desirable now possible. After all, they said, Piramal was a buildand-sell guy, Thyagarajan had a build-and-build philosophy. Piramal dealt with institutions, Thyagarajan with individuals.

The deal came close to collapsing, not once, not twice, but thrice. “There have been instances where some people from the (Shriram) group told me this transaction is over,” says Piramal. “But I must say RT has been consistent and firm…when he was clear, I felt reassured.” Thyagarajan speaks of the learning curve of a relationship. “Differences are bound to arise and people are uncomfortable with partnership,” he adds. “It takes longer to develop enthusiasm in such an alliance.’’

Courtship

For Piramal and Thyagarajan, something clicked in their very first meeting. Says Piramal: “We just discussed how he grew the business, the values they hold, corporate governance.” In the lead up, Thyagarajan had been checking on Piramal. “You will be lucky to have Piramal as a partner,” 87-year-old Anna Rajam Malhotra, the country’s first woman IAS officer and an advisor to the Shriram Group, told Thyagarajan.

For Thyagarajan, the important thing was Piramal should feel comfortable. “We wanted him to have the confidence and trust because he was putting the money,” he says.

Piramal came away humbled. Learning about Thyagarajan’s altruistic nature helped him understand the rationale behind the ownership structure he had reservations about.

Piramal, who owns 54% of Piramal Enterprises, was shocked to learn that Thyagarajan and his two sons don’t own shares in the business, that no family member was in the business and that he drew a meagre salary. “One won’t even get a secretary for that salary in Mumbai,’’ says Piramal.

On business, the first conversation was on Shriram Transport Finance (STFC), which loaned money to individuals to buy trucks, esaccess banks. Soon, an STFC would be the first test of this developing relationship.

Trial

Thyagarajan, who has turned giving private equity funds profitable exits on their capital into an art form, wanted Piramal to buy the 20% stake held by American PE fund TPG Capital in STFC. An understanding between the three parties was in place. But the STFC stock shot up.

On February 22, 2013, TPG sold 10% in the market for Rs 1,600 crore. “It was a bit of a shock,” says Piramal. “I think they were persuaded by some people not to sell to us. I personally feel they were misled.”

Thyagarajan stepped in and persuaded TPG to sell the remaining 10% to Piramal, which it did three months later, for Rs 1,653 crore. Piramal feels the first experience had also made TPG wiser. “It is not easy to sell such a large stake in the market and, I think, they had some difficulty time selling it,” he says. “They realised it makes sense to sell it in one shot to us.’’

A few months later, passing offers from Japanese financial services firms and sovereign funds, Thyagarajan asked Piramal to become a partner in the group’s holding company, Shriram Capital, which owns a full suite of financial services. Piramal didn’t like one part of that suite: the insurance business, which Shriram runs with its South African partner Sanlam. Piramal saw insurance as a “cash guzzling” business.

Thyagarajan felt otherwise, and he showed Piramal the books. “I saw the business model. I have to say that I was surprised,” says Piramal. “It was unique. It had been generating profits from day one.”

Marriage

The arc from the first deal to the second—from just truck financing to a bouquet of financial services—made Piramal realise that Thyagarajan was seeking from him a partnership that was deeper and was for keeps. It also fit into the vision that Piramal Enterprises had for financial services.

According to Piramal, if he had tried to develop such a business organically, of the scale and size that Shriram is, it would have taken as much as 20 years. “And even then, we don’t know if we would be successful,” he says. Piramal was game. Adds Thyagarajan: “We had enough capital, but we were chasing a local partner to grow the business.” But not everyone in Shriram saw Piramal as that partner.

Again, Piramal placed faith in Thyagarajan’s word. “His understanding of the businesses and human behaviour is a notch above that of others within that group and among most people,’’ says Piramal. On April 17, Piramal Enterprises bought 20% in Shriram Capital for Rs 2,014 crore. “Ajay was an accepted leader, not aggressive, patient, straight-forward and generous,” says Thyagarajan.

Covering the ground between the two was the investment banker who arranged this deal, Balasubramaniam of UBS. “Usually, I am very hesitant with investment bankers, but I was surprised that here was one who real ly added value—to explain their viewpoint, our viewpoint and to bring us together,” he says. “Both RT and I trusted the banker a lot. Balasubramaniam declined to participate in the story.

In between such parleys, in February, Piramal presented a book on maths to Thyagarajan’s, who is a member of the Chennai Mathematical Institute.

‘’Today’s mathematics is moving completely in different directions and not much understood by me,” says Thyagarajan. If he ever decides to try and understand it better, Thyagarajan may not mind handing over the reins to his new partner.